Suppose that the economic capital estimate for two business units are as follows:
Type of risk | Business unit 1 | Business unit 2 |
Market risk | 10 | 50 |
Credit risk | 30 | 30 |
Operational risk | 50 | 10 |
The correlation between market risk and credit risk in the same business unit is 0.3. The
correlation between credit risk in one business unit and credit risk in the other is 0.7. The
correlation between market risk in one business unit and market risk in the other is 0.2.
All other correlations are zero. Calculate the total economic capital. How much should
be allocated to each business unit?
And this one (2):
Suppose that daily gains and losses are normally distributed with standard deviation of $5 million. (a) Estimate the minimum regulatory capital the bank is required to hold (assume a multiplicative factor of 4.0). (b) Estimate the economic capital using a one-year time horizon and a 99.9% confidence limit, assuming that there is a correlation of 0.05 between gains or losses on successive days.